Welcome To Step 3!
Here we will guide you through everything you need to do to create a budget. Take your time and explore what we have to offer!
Welcome to your third step on your investing journey! On this page we talk about how to create a budget, why it is important and how it applies to your investing strategy!
We go into quite a bit of detail here, so don't be discouraged if it seems to much just keep at it and keep learning!
Read what we have carefully and don't get discouraged. If you have any questions get in contact with our team!
One of the most critical steps in any successful investment strategy is understanding how much of your income you can allocate to investing. Creating a solid budget not only helps you manage your daily expenses but also ensures that you're able to invest consistently over time without overextending yourself financially. By establishing a clear budget, you create a balance between your current needs and your future goals, enabling you to stay focused on building wealth in the stock market without risking financial strain in the present.
The Importance of Budgeting for Investing
A well-structured budget helps you manage your spending, save for important life events, and still have room for long-term wealth-building goals like investing in the stock market.
Without a clear budget, it’s easy to either under-invest or over-invest. Over time, these inconsistencies can derail your financial progress. A structured budget helps you avoid such pitfalls and ensures that you’re making steady progress toward your goals.
Steps to determine your investment allocation
Before deciding how much of your income should go into investing, follow these steps:
Track your monthly income.
The first step is to identify your monthly income, which includes all sources of income, such as:
- Salary (after tax deductions)
- Side hustles or freelance work
- Passive income (dividends, rental income, etc.)
Knowing your total monthly income gives you a starting point for determining how much you can allocate toward investments.
Calculate your expenses:
Next, identify your fixed monthly expenses. These are the costs that don’t vary from month to month and include:
- Rent or mortgage
- Utilities (electricity, water, internet)
- Loan payments (student loans, car payments)
- Insurance (health, auto, home)
- Subscriptions (Netflix, gym memberships, etc.)
Once you have these expenses calculated, subtract them from your income to see how much is left over.
Account for variable expenses.
Variable expenses are those that fluctuate month to month, such as:
- Groceries
- Gas or public transportation
- Entertainment (eating out, movies, etc.)
- Miscellaneous spending (shopping, gifts, etc.)
Track your spending for a couple of months to get an accurate estimate of your average monthly variable expenses.
Set aside emergency savings.
It’s important to have an emergency fund in place. Once your emergency fund is set up, you can consider investing excess funds. Allocate a percentage for investing.
Once you’ve deducted your fixed expenses, variable expenses, and emergency savings, you can determine how much of the remaining income is available for investing. The 50/30/20 rule is a popular budgeting framework, where:
- 50% of your income goes toward needs (like rent and utilities)
- 30% goes toward wants (like entertainment and dining out)
- 20% is saved or invested
Of that 20%, a portion should go into investments. For example, if your income is $4,000 per month, using the 50/30/20 rule would allocate $800 toward savings or investments. If you're prioritizing long-term growth and you don't have immediate debt obligations, you may decide to allocate a higher percentage to investing.
Consistent Investment Strategy:
Investing regularly—even small amounts—can lead to substantial growth over time due to compound interest. By consistently investing a set amount each month, you're benefiting from dollar-cost averaging, which reduces the impact of market volatility. For instance, even when the market is down, you’ll be buying stocks at lower prices, potentially leading to greater returns in the long run.
Example: Let’s say you decide to invest $500 per month into an S&P 500 ETF like the SPDR S&P 500 ETF (SPY). If the stock market returns an average of 7% annually, you would have approximately $6,000 invested after one year. Over a 10-year period, you could accumulate more than $70,000 assuming consistent contributions and returns.
Using Tools to Track Your Budget and Investments:
To ensure that you stay on track with both budgeting and investing, use a combination of budgeting tools and investment platforms. These tools can help you monitor your income, expenses, and investments in real-time.
Budgeting Tools
- Mint: Mint is a free budgeting app that tracks your income and expenses, categorizing them automatically. It helps you set spending limits and visualize your progress toward savings goals, making it easier to allocate funds for investing.
- You Need a Budget (YNAB): YNAB is a budgeting software that helps you allocate funds for specific goals, including savings and investing. It also helps you build an emergency fund and prioritize your financial goals.
- PocketGuard: This app tracks your income and expenses, showing you how much money you have left to spend or invest each month after bills and savings.
Investment Platforms
Once you’ve allocated funds for investing, using the right platforms to make the most of your money is essential. Below are a few platforms that can help you get started:
- Vanguard: Vanguard is an excellent platform for investors looking to build a diversified portfolio with low-cost index funds and ETFs. They offer tools to help you calculate how much to invest and the types of funds that align with your goals.
- Fidelity: Fidelity provides educational resources to help you determine how much to invest and also offers tools like retirement calculators to help with long-term planning.
- Betterment: Betterment is a robo-advisor that helps you automatically allocate funds based on your goals. You can set monthly contributions and allow the platform to handle the investments for you, which is ideal if you're new to the stock market.
- Robinhood: Robinhood is a popular investment app that allows you to invest in stocks, ETFs, and options without paying commissions. It's a good choice if you prefer hands-on investing and want to manage your own portfolio.
Check our investment platform info page here for more info!
Well done! You completed Page 3. We know budgeting might seem boring to some but it is a very important step as it gives you a structure to stick by and decreases the chances of emotional investing! Click Here to continue to Step 4: How to Open a Brokerage Account!